Oil rallies from 3-1/2-year low as stocks rise

By Edward McAllister

NEW YORK (Reuters) - Oil rose 1 percent on Friday as stock markets recovered from early lows caused by continuing economic gloom.

U.S. crude rose 51 cents to $49.93 a barrel, after earlier dipping to $48.25, the lowest level in 3-1/2 years. London Brent crude settled up $1.11 at $49.19 a barrel.

On Thursday, oil fell more than 7 percent on economic data to settle at its lowest since May 2005. It has plummeted nearly $100 a barrel since record highs of over $147 in July, with demand shrinking as the credit crisis hit large consumer nations.

U.S. stocks bounced back on Friday after falling into negative territory as shares of financials, including Citigroup (C.N), declined and investors worried about the deepening economic slump.

Stocks turned higher on Friday afternoon after NBC News reported that New York Federal Reserve President Timothy Geithner will be nominated as President-elect Barack Obama's Treasury Secretary.

Further support came as the dollar fell against a basket of other currencies. A weaker dollar makes oil cheaper for holders of other currencies and tends to support prices.

"Crude is up as the stock market is bouncing and refined products are moving up, particularly heating oil, on cold weather," said Phil Flynn, an analyst at Alaron Trading in Chicago. "Prices of other major commodities such as gold and silver are up and the dollar is down, which is also supportive."

JP Morgan said on Friday it expected world oil demand in 2009 to decline by 500,000 barrels per day as the global credit crunch continues to rack the world economy.